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circular flow of income


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In Keynesian economics this is a simple model of a static economy, based on the assumption of a one-period lag between income and expenditure. If there were neither injections of new purchasing power into this flow nor leakages out of it, total income in each period would be equal to the spending arising from incomes in the previous period, and total income would remain constant over time. Injections of new purchasing power not derived from last period's income can be made by investment, government spending, or exports. Leakages from the circular flow, by which this period's income does not lead to incomes next period, are caused by saving, tax payments, or imports. If injections and leakages are equal, incomes will be constant; if injections exceed leakages, incomes rise over time; and if leakages exceed injections, incomes fall.

Subjects: Economics.


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